Spectrum efficiencies don't offset competitive harm, DOJ argues

The U.S. Department of Justice Wednesday moved to block the proposed $39 billion merger between AT&T and T-Mobile.

In a civil antitrust lawsuit filed with the U.S. District Court with the District of Columbia today, the DoJ argued that the proposed merger would significantly damage competition in the wireless industry, especially since T-Mobile has historically offered low-cost wireless voice and data services for customers. The DoJ also contended that any efficiencies gained by combining AT&T and T-Mobile spectrum would not be enough to offset the damage done to U.S. consumers by further consolidation of the wireless industry.

"Any way you look at this transaction, it is anticompetitive," says Sharis Pozen, an acting assistant attorney general, at a press conference. "Our action today seeks to ensure that our nation enjoys the competitive wireless industry it deserves."

The DoJ said it carefully examined AT&T's argument that consumers would benefit from the proposed merger because it would give AT&T a strong spectrum portfolio that it could use to build out a high-quality 4G LTE network throughout the United States. The DoJ rejected this argument by noting that AT&T already had significant unused spectrum holdings and said that "AT&T could obtain substantially the same network enhancements... if it simply invested in its own network without eliminating a close competitor."

To make matters worse for AT&T, the company had previously agreed to pay T-Mobile owner Deutsche Telekom a $3 billion cancellation fee if the merger is not approved. According to a Bloomberg report, it would "also provide T-Mobile USA with wireless spectrum in some regions and reduced charge for calls into AT&T's network."

For its part, AT&T seems unbowed by the DoJ's suit as AT&T general counsel Wayne Watts released a statement saying the company was "surprised and disappointed by today's action," while also vowing "to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed."

"The DOJ has the burden of proving alleged anti-competitive affects and we intend to vigorously contest this matter in court," Watts added. "At the end of the day, we believe facts will guide any final decision and the facts are clear."

Julius Genachowski, the chairman of the FCC, issued a statement that didn't directly support or oppose the DoJ's suit but that acknowledged that the FCC also had "serious concerns about the impact of the proposed transaction on competition."

But even if the DoJ is successful in its suit, that doesn't mean the AT&T-T-Mobile merger is completely dead. As telecom analyst Jeff Kagan noted today, the DoJ's suit likely only means that the merger is dead in its current form. Kagan believes that AT&T could rework the framework of its merger and still end up acquiring T-Mobile.

"This deal is not dead but it will be different," he says. "The question is what AT&T will have to give up."

AT&T's proposed merger with T-Mobile has come under criticism from consumer groups, rival wireless carrier Sprint and analyst firms such as the Yankee Group, who contend that the merger will lead to the emergence of a duopolistic wireless telecom market controlled largely by Verizon and AT&T. Were the merger to pass regulatory muster, it would be the fourth major wireless carrier merger in eight years, following AT&T-Cingular in 2004, Sprint-Nextel in 2005, and Verizon-Alltel in 2008. AT&T would become by far the largest wireless carrier in the United States with more than 130 million subscribers.